In today’s globalization role of corporate finance and the coast of capital to develop any company

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INDORE INSTITUTE OF LAW
(Affiliated to D.A.V.V. & Bar Council of India)
B.A.LL.B. (HONS)
Project on
(Subject)_______________________________
Topic: 01_______________________________
Submitted to:
Asst. Prof._____________________________
Submitted by:
Name ____________________Signature______
Year _____ Semester ______
Date-:___/___/____

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Certificate Of Supervisor
This is to certify that the project work entitled “In today’s globalization role
of corporate finance and the coast of capital to develop any
company ”; submitted by Avinash Rai for the partial fulfillment of the B.A.LL.B
Degree (Eight semester) offered by Indore Institute of Law, Indore (affiliated
to D.A.V.V. and BCI) during the academic year 2013-18 is a record of the Student’s
own work carried out by her under my supervision. The matter embodied in this thesis
is original and has not been submitted for the award of any Degree, Diploma or such
other titles.
Date : 1-07-2017
Nameof Supervisor:Assistant Proff. Manpreet kaur Bhatia
Signatureof Supervisor

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Declaration of Researcher
This is to certify that Thesis/Report entitled “In today’s globalization role of
corporate finance and the coast of capital to develop any
company” which is submitted by me in partial fulfillment of the requirement for the
award of degree B.A.LLB. Degree (Eight Semester) offered by Indore Institute of Law,
Indore comprises only my original work and due acknowledgement has been made in
the text to all other material used.
Date: 1/07/2016 Nameof Student:
Avinash Rai

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Acknowledgement
I would like to take this opportunity to express my profound gratitude and deep
regard to my (Project Guide Ms.Manpreet kaur Bhatia), for his exemplary
guidance, valuable feedback and constant encouragement throughout the duration of
the project. Her valuable suggestions were of immense help throughout my project
work. Her perceptive criticism kept me working to make this project in a much better
way. Working under her was an extremely knowledgeable experience for me.
I would also like to give my sincere gratitude to all the friends and colleagues who
helped me in this research work, without which this research would be incomplete.
Date: 1/07/2017
Submitted by:AvinashRai

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ABSTRACT
First, because the risks of equity are shared among more investors with different
portfolio exposures and hence a different “appetite” for bearing certain risks,
equity market risk premiums should fall for all companies in countries with access
to global markets. Although the largest reductions in cost of capital resulting from
globalization will be experienced by companies in liberalizing economies that are
gaining access to the global markets for the first time, risk premiums can also be
expected to fall for firms in long-integrated markets as well.
Second, when firms in countries with less-developed capital markets raise capital
in the public markets of countries (like the U.S.) with highly developed markets,
they get more than lower-cost capital; they also import at least aspects of the
corporate governance systems that prevail in those markets. For companies
accustomed to less-developed markets, raising capital overseas is likely to mean
that more sophisticated investors, armed with more advanced technologies, will
participate in monitoring their performance and management. And, in a virtuous
cycle, more effective monitoring increases investor confidence in the future
performance of those companies and so improves the terms on which they raise
capital.
Besides reducing market risk premiums and improving corporate governance,
globalization also affects the systematic risk, or “beta,” of individual companies. In
global markets, the beta of a firm's equity depends on how the stock contributes to
the volatility not of the home market portfolio, but of the world market portfolio.
For companies with access to global capital markets whose profitability is tied
more closely to the local than to the global economy, use of the traditional Capital

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TABLE OF CONTENT
INTRODUCTION
THE ROLE OF FINANCIAL GLOBLISATION
THE EFFECT OF GLOBLISATION ON BUSINESS
 RISE IN COMPTITION
 RISE IN TECHNOLOGY AND KNOW HOW
 RISE IN OPPORTUNITY
 RISE IN INVESTMENT LEVELS
POSITIVE EFFECT OF GLOBLISATION FOR DEVELOPING COUNTRY
BUSINESS
NEGATIVE EFFECT OF GLOBLISATION FOR DEVELOPING COUNTRY
BUSINESS
COST OF CAPITAL
MEANING
WHAT IS CAPITAL
WHAT IS THE COST OF CAPITAL
CONCLUSION

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Introduction
International financial markets are progressively becoming one huge, integrated,
global capital market—a development that is contributing to higher stock prices in
developed as well as developing economies. For companies that are large and
visible enough to attract global investors, having a global shareholder base means
having a lower cost of capital and hence a greater equity value for two main
reasons:
First, because the risks of equity are shared among more investors with different
portfolio exposures and hence a different “appetite” for bearing certain risks,
equity market risk premiums should fall for all companies in countries with access
to global markets. Although the largest reductions in cost of capital resulting from
globalization will be experienced by companies in liberalizing economies that are
gaining access to the global markets for the first time, risk premiums can also be
expected to fall for firms in long-integrated markets as well.
Second, when firms in countries with less-developed capital markets raise capital
in the public markets of countries (like the U.S.) with highly developed markets,
they get more than lower-cost capital; they also import at least aspects of the
corporate governance systems that prevail in those markets. For companies
accustomed to less-developed markets, raising capital overseas is likely to mean
that more sophisticated investors, armed with more advanced technologies, will
participate in monitoring their performance and management. And, in a virtuous
cycle, more effective monitoring increases investor confidence in the future
performance of those companies and so improves the terms on which they raise
capital.
Besides reducing market risk premiums and improving corporate governance,
globalization also affects the systematic risk, or “beta,” of individual companies. In
global markets, the beta of a firm's equity depends on how the stock contributes to
the volatility not of the home market portfolio, but of the world market portfolio.
For companies with access to global capital markets whose profitability is tied
more closely to the local than to the global economy, use of the traditional Capital
Asset Pricing Model (CAPM) will overstate the cost of capital because risks that
are not diversifiable within a national economy can be diversified by holding a
global portfolio. Thus, to reflect the new reality of a globally determined cost of
capital, all companies with access to global markets should consider using a global
CAPM that views a company as part of the global portfolio of stocks. In making

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this argument, the article reviews the growing body of academic studies that
provide evidence of the predictive power of the global CAPM as well as the
reduction in world risk premiums.
The role of financial globalization
Trade liberalization, and its impact on economic growth, employment and
inequality, has come under considerable scrutiny in recent years, but much less
attention has been paid to the effect of financial market liberalization.1 Now that
the recent financial market turmoil in the United States has turned into the “first
global financial crisis of the twenty first century” (Felton and Reinhart, 2008),
however, the labor market fall-out from such crises deserves renewed interest. The
spillover of US financial market stress to other developed and emerging markets,
in the form of interest rate hikes and the loss of liquidity, has demonstrated yet
again that events in international financial markets can have a substantial impact
on domestic economic and social development, with adverse consequences for
employment growth and income opportunities. Though is chapter presents a review
of the existing evidence, with a particular focus on the impact of financial
liberalization on growth, employment creation and income inequality. In theory,
financial liberalization and the free allocation of global capital flows should
generate substantial macroeconomic benefits for both capital exporters and
recipient countries. Global trend productivity and employment are believed to
grow faster, thereby lifting less developed countries out of poverty and helping to
maintain (or further improve) living standards in the developed world. Low-
income households are expected to benefit in particular, with the result that both
global and within-country inequality are decreased. It has been suggested that
financial globalization can both boost average per capita income
● It can provide low-income countries with access to capital and help to improve
the allocation of funds. It should also make it easier for low-income households to
access the capital market and thereby lower income inequality within countries. By
imposing discipline on governments, it can improve macroeconomic policy-
making and encourage the implementation of pro-growth reforms. The is would
improve income prospects across the board but would be particularly beneficial for
low-income households (“pro-poor growth”).
● By strengthening corporate governance (for instance, through a more
competitive market for corporate control), the argument goes, financial

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globalization helps to put capital flows to the most efficient and productive use and
ensure that executives are performing at their best. This improves the business
environment in both emerging and developed countries. The experience of the past
two decades has, however, shed signify cant doubt on whether these benefits have
materialized. Trend productivity growth rates have accelerated – but not
necessarily in the countries that opened their capital accounts the widest. Regular
boom-bust cycles have wiped out earlier income gains to a large extent – mainly in
middle-income countries – despite a global trend towards less volatility in
economic activity. Low-income households do not seem to have benefit ted from
improved access to financial markets to insure themselves against shocks. As a
consequence, global inequality has, at best, remained constant, while inequality
within countries seems to be rising, regardless of their level of economic
development (see Chapter 1). Though is chapter reviews the empirical evidence for
the macroeconomic effects of financial globalization and discusses why several of
the expected benefits have failed to materialize, in terms of both long-term
economic growth and the vulnerability of low-income households. The indirect
effects that financial liberalization may have on inequality are discussed in the
light of its impact on domestic policy-making. Lastly, one specific dimension of
financial globalization, namely the spread of modern corporate governance
practices, is considered, and in particular the links between executive pay and
performance.
● By imposing discipline on governments, it can improve macroeconomic policy-
making and encourage the implementation of pro-growth reforms. This would
improve income prospects across the board but would be particularly beneficial for
low-income households (“pro-poor growth”).
● By strengthening corporate governance (for instance, through a more
competitive market for corporate control), the argument goes, financial
globalization helps to put capital flows to the most efficient and productive use and
ensure that executives are performing at their best. This improves the business
environment in both emerging and developed countries. The experience of the past
two decades has, however, shed significant doubt on whether these benefits have
materialized. Trend productivity growth rates have accelerated – but not
necessarily in the countries that opened their capital accounts the widest. Regular
boom-bust cycles have wiped out earlier income gains to a large extent – mainly in
middle income countries – despite a global trend towards less volatility in
economic activity. Low-income households do not seem to have benefited from

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improved access to financial markets to insure themselves against shocks. As a
consequence, global inequality has, at best, remained constant, while inequality
within countries seems to be rising, regardless of their level of economic
development (see Chapter 1). This chapter reviews the empirical evidence for the
macroeconomic effects of financial globalization and discusses why several of the
expected benefits have failed to materialize, in terms of both long-term economic
growth and the vulnerability of low-income households. The indirect effects that
financial liberalization may have on inequality are discussed in the light of its
impact on domestic policy-making. Lastly, one specific dimension of financial
globalization, namely the spread of modern corporate governance practices, is
considered, and in particular the links between executive pay and performance.
The Effects Of Globalizations On Business
We’ve seen such a growth in globalization and its tentacles will only keep
spreading as time goes on. We have noticed how the enquiries from all over the
world have increased exponentially over the last few years. There’s no doubt about
the benefits this brings us all in business. There is a permanent shift in the domain
of knowledge that enables any individual from any country to access large
databases of resources and information.
Rise in Competition
This is the single biggest benefit of globalization all around the world.
With enhanced competition from foreign brands and companies, industries of
every nation are compelled to improve their standards and quality and customer
satisfaction services.
This benefits the customers and the economy as a whole, and raises the standard of
living of everybody.
This could be viewed as a negative impact by many, but no-one can deny the
impact it has had.

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Rise in Technology and Know How
The rise in knowledge levels of countries as newer cultures and technologies are
opened to a particular area are clear.
Their knowledge base also grows and expands simultaneously.
As a result, they are better able to handle their primary and secondary industries,
and this ultimately affects their tertiary sectors in a positive manner as well.
Rise in Opportunities
With a larger number of industries and resources available, the opportunities for
people grow exponentially too.
There are many more jobs available to people, and more and more people are
Liaison exposed to the lucrative benefits of moving abroad.
This increases immigration rates as well, thus giving people the chance to grow
economically and socially.
Whatever your viewpoint of immigration, there is no doubt it has opened up
masses of opportunities to millions of people who would otherwise have not seen
any improvements
Rise in Investment Levels
The rise in foreign investment in countries helps industries and native cities grow
at a rapid pace, and this is something that every nation should be open to since it is
a highly beneficial venture for them.
There is so much that they can gain in the process as well. Every country now
imports more than ever before, so that global growth has shared resources and
abilities in a way that we could never have imagined even 50 years ago
Whatever your viewpoints on globalization, you cannot hold it back and it is
offering opportunities that we have never seen before.

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Only by tapping into the benefits that exist within the global network will nations,
industries, companies and individuals learn to grow and nurture each other to
everyone’s benefit.
Positive and negative effect of globalization for developing country
Positive impact of globalization on developing countries is an increase in standard
of living. One of the aims of globalization of economies is to reduce poverty, and
this aim is being achieved by the increased access to foreign funding from
industrialized nations to developing countries. And the spending of these funds on
improving the education, health, social, and transport infrastructure of the
developing nations aids in improving the standard of living of the people.
Thanks to globalization, developing countries now have access to new markets.
And this has been taken full advantage of by several nations (Bertucci & Alberti
2001). This opening allows the transnational movement of labor, foreign capital,
new technology and management to developing countries from the more
industrialized nations. There is now an increase in the inflow of foreign direct
investment to developing countries as more than a quarter of world foreign direct
investment inflows were received between 1988 and 1989 and this has increased
yearly (World development indicators in Bertucci & Alberti 2001). From US $12
billion in 1980, private capital flows to developing countries increased to US $140
billion by 1997 (Bertucci & Alberti 2001). The only catch to this is that the bulk of
these capital flows so far is strictly limited to a small number of developing
countries, especially the big ones such as Nigeria, Ghana, South Africa, India,
Brazil, China, etc. ‘The report on financing for development prepared for the UN
Secretary-General notes that, during the period 1993 to 1998, 20 countries
accounted for over 70 per cent of all FDI inflows to all developing countries’
(Bertucci & Alberti 2001).
Again looking at the effect of globalization on world trade, and indirectly on trade
in developing countries, it is quite obvious that it enhances economic growth. One
of the emphasis of globalization is that member countries should open their
markets to ensure open trading free of limitations. In this regard, liberalization of
trade would lead to the removal of all restrictions, causing unrestricted forces of
demand supply to direct the movement and substitution of the factors of
production, leading to efficient investment by producers (Mubiru 2003). This is
clearly evident in developing countries such as Uganda in which reduced trade
restrictions has lead to a large improvement in the nation’s economy (Lawal 2006).

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Again, from the positive impact of globalization on trade, there is an ‘emerging
trend towards trade in production components’ (Mubiru 2003). Reduction in trade
restrictions in a lot of developing countries lead to the partial relocation of several
manufacturers from more industrialized nations to new locations in developing
countries. This may have arisen as a result of tax exemptions or reduced tariffs
offered by many developing countries in order to encourage foreign investors, or
increased proximity to cheap labor and occasionally consumers. And the resultant
benefits to the host developing nations are numerous. One is an increase in
employment opportunities for the indigenes as there is creation of more jobs. Also,
influx of foreign manufacturers may also lead to the import of new technology.
And with transfer of new technology from developed countries comes more
opportunities for training for local employees. ‘Quite often manufacturing
subsidiaries have also been linked to establishment of distribution networks that
expand employment even further’ (Mubiru 2003). This, in some cases, has lead to
impaction of entire regions at a time, causing the benefits to go beyond national
boundaries. Taking this further, the slackening of barriers to various other products
and sectors, especially agricultural products, would lead to immense gains to
developing nations.
In addition, globalization leads to global competition, and in the long run, to local
competition, ensuring the improvement of creative abilities and innovative
capabilities. Competition between producers of commodities ensures the quality of
the products and services at reduced prices, leading to specialization and
efficiency.
Other positive impacts of globalization on developing countries include better
access to foreign culture and entertainment through television broadcasts, music,
clothing, movies, etc; increased cooperation between governments and the ability
to work with better focus towards the achievement of common goals; and diffusion
of knowledge and technical know-how among member countries, especially the
less-privileged countries. Much has been said about improvement in technology
but globalization also improves communication as it leads to faster means of
communicating and travel.
But as much as globalization holds a lot of opportunities, it has a lot of negative
effects which several skeptics have used to criticize the concept and its “so-called
benefits”, especially to developing nations. As stated earlier, globalization is
somewhat partial as industrialized nations benefit more from it than developing

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countries. This uneven impact is well demonstrated by the rise of India and China
‘which reveals highly uneven distribution of the benefits of globalization among
countries’ (Globalization and its impact 2004).
One of the major negative impacts of globalization on developing countries is
poverty. Globalization has been said to increase poverty. A former United nations
Secretary-General, Kofi Annan, stated that at present, only a relatively small
number of countries are enjoying these gains [of globalization]. Many millions of
people are excluded, left behind in squalor (Annan 2000). Although the exact
impact of globalization on poverty is very difficult to assess, research estimates
show that poverty has increased by 82 million, 14 million, and 8 million in sub-
Saharan Africa, Europe and Central Asia, and Latin America and the Caribbean
respectively (Globalization and its impact 2004). Taking a more critical look at
this, globalization itself cannot be held responsible for most of the poverty in
developing countries as other factors such as bad governance, poor economic
policies, weak reforms, etc have also implicated. But globalization is a major
factor. As claimed by Princova (2010), globalization leads to wealth redistribution
global richness and local poverty’. It makes the rich countries, in this case, the
industrialized nations, to become richer, and the poor nations, the developing
countries, to become poorer (Zygmunt Bauman in Beck 1997).
Although several African economies initially benefited from globalization as there
was a transient economic growth, over the years, they have become heavily
dependent on the wealth of well developed nations (Laval 2006). ‘African
economies are increasingly geared to the export of a very limited range of
commodities and the importation of a wide range of consumer goods’ leading to
their being referred to as a largely consuming economy (Adedeji 1981). To make
this worse, agricultural growth is very feeble. And since the 1980s, the terms of
trade and the import capacities have declined sharply resulting in the reduction in
the per capita income of the region (Laval 2006). Compounding the woes of
several developing states is the enormous debt build up. ‘According to the report of
the survey of Economic and Social conditions in Africa, (1977-78), the total
outstanding external debt of African Countries rose from $9.02 billion in 1970 to
$18.88 billion in 1974 and $30.02 billion in 1976, while the total debt services rose
to $0.89 billion in 1970, $2.43 billion in 1974 and $3.03 billion in 1976’ (Laval
2006). These and several other evidences has led to Africa, which houses a major
part of world developing states, to being referred to as the most heavily indebted
region globally.

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Considering globalization from the health and disease angle, it has impacted
seriously on the epidemiology of infectious diseases, as regards the ability to
prevent, control and eradicate these diseases, worldwide and especially in
developing countries. One of the ways by which this has occurred is the
enhancement of technological capacities worldwide, leading to increased emissions
and a resultant global warming. This in turn leads to enhanced breeding of vectors
such as mosquitoes, animal or human behaviors such as bathing in pools which
may have been contaminated with the larvae of such is to some, etc (Saker et al.
2004). Over the years, large increases in international trade have encouraged the
introduction of western diets to the previously natural diets of most developing
countries. This has led to changes in dietary habits as the so-called “ethnic foods”
have been relegated to the background and more and more junk food are being
consumed in the name of western diets (Saker et al. 2004). And in the long run,
western diseases are gradually becoming prevalent in developing nations.
Again, introduction of western lifestyle through globalization to the developing has
led gradually loss of core values leading to increased looseness and promiscuity
among the youth and adults alike. This has caused a surge in the numbers of those
living with HIV/AIDs, and the long-term effects on the economy and society at
large.
Globalization has increased the vulnerability of the rural farmer in the remotest
village to world events. An example is the case of coffee farmers in Uganda. Prior
to the start of liberalization, the country’s Coffee Marketing Board (CMB), on the
behalf of the government, served as the middle-man between the coffee farmers
and foreign buyers. In doing this, the Coffee Marketing Board made sure that the
farmers themselves were guaranteed standard coffee prices based on assured
quotas negotiated by the Coffee Marketing Board on the world coffee market on
the government’s behalf (Mubiru 2003). Although the individual farmer had to pay
the cost of this existing infrastructure, thereby reducing the net income to the
farmer’s pocket, he/she was still assured of a standard price. But since
globalization came in and the Coffee Marketing Board was abolished, the farmers
have been made vulnerable to changes and shocks in the world market. And for
developing countries to have buoyant agricultural sectors, the farmers have to be
sheltered from the full vagaries of the world market, a task made very much
impossible by globalization.
Today, the employment structure in developing nations has been changed, a result
of globalization and capitalism (Bacchus & Foerster 2005). Before the advent of

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globalization in developing countries, the main source of occupation for the active
members of the population, both men and women, was agriculture. But since the
influx of foreign corporations occurred, there has been a sect oral shift in the labor
force as more hands are being drafted towards assembly production and fewer
hands left in the fields. Empirical evidence shows that there has been a significant
decline in male agricultural work ‘from 62% to14% a similar decline in agriculture
[for women]’ (Schultz 1990 in Bacchus & Forester 2005). Another effect of
globalization in this regard is a relative increase in unemployment. Several
research studies have examined the hypothesis that globalization does not only
affect the income level of the labor force, but in addition exposes the workers to
increased economic vulnerability and uncertainty via less secure employment and
increasingly volatile income (Goldberg & Pavcnik 2007). All these, coupled with
shocks in the global economy and the act of outsourcing have led to the laying off
of thousands of workers who previously worked in the big multinational.
Globalization has succeeded in widening the inequalities in skill premium, wage,
income and consumption in developing countries (Goldberg & Pavcnik 2007).
‘Globalization affects individuals through three main channels: changes in their
labor income; changes in relative prices and hence consumption; and changes in
household production decisions’ (Goldberg & Pavcnik 2007). Prior to the onset of
globalization, there existed a little wage difference between skilled and unskilled
workers in most developing nations. But since globalization came in, there is a
widely accepted fact that increases in the demand of skilled labor drove the drastic
increase in skill premium. Although the exact cause of increase in the need for
skilled labor is still the subject of debate, but evidence from Attanasio and Szekely
(2000); Sanchez-Paramo and Schady (2003) (in Goldberg & Pavcnik 2007) and
others support the increase in demand of educated workers in developing countries.
Similarly, different theories have been proposed for the changes in relative prices
and consumption as caused by globalization. But the most widely accepted
conclusion is that globalization has contributed largely to inequalities in
developingnations.
Better opportunities in more developed countries, coupled with the possibility of
easy travel, have lead to a lot of educated people being lured away from
developing countries. It has been said that more than US $4.1 billion is being spent
annually in the African continent to employ 150,000 expatriates to replace the
intellectual vacuum being created by the ongoing brain drain (Globalization and its
impact 2004).

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In addition, globalization has resulted in the loss of cultural boundaries. In this
wise, it has caused the extinction of several languages in many developing nations.
The way languages are going extinct is very rapid, and this has been predicted to
continue unless something can be done to stop the complex process of
globalization (Cronin 2003). The enhanced interaction of western cultures with
local cultures in the developing world has led to melting of previously existing
cultural barriers so that the individuality of the local cultures begin to fade. The
increase in international travel has also contributed to this as the World Health
Organization estimates that approximately 500,000 people are in airplanes at any
one point in time (The Guardian 28 April 2009, p. 10). Also, the adoption of
multiculturalism coupled with the melting of international barriers and easy spread
of propaganda through the internet has led to youths of developing nations
imbibing extremist ideas, causing their being used by terrorists in suicide attacks,
as is occurring in many developing nations such as Somalia, Sudan, Tunisia,
Egypt, etc.
The encouragement of free trade zones in developing countries in a bid to woo
foreign investors has resulted in negative effects. A documentary released in 2003,
The Hidden Face of Globalization, revealed how female factory workers in free
trade zones are being physically and verbally abused so as to keep up with the
production demands from the firms (Bacchus & Forester 2005). In a bid to
maximize profit, most of these multinational companies prefer to refrain from
creating healthier and safer working environments for their workers. According to
Fuentes and Ehrenreich 1998 (in Bacchus & Forester 2005), 12 women died in
Taiwan from the inhalation of toxic fumes at a Philco-Ford assembly plant. And
coupled with the inability of the workers to unionize as a result of the free trade
policy, the workers have to suffer in silence.
Other negative impacts of globalization in developing countries include the
alteration of the environment and reduction in environmental sustainability,
increase in human trafficking, exploitation of cheap labor by foreign industrialists.
This paper has been able to show globalization as a complex process with wide
reaching impacts on developing countries. Globalization on its own has a lot of
gains and benefits, but due to the influence of some other factors and especially the
nature and structure of most developing nations, it impacts negatively despite its
advantages. These impacts hold serious challenges for developing countries in the
face of needed economic growth and development for these countries. To this end,

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the leadership of the various nations in the developed world must understand that
their major responsibilities lie in the needs of their immediate societies. It is
therefore imperative that these countries formulate rational policies and reforms
that would guide liberalization of trade and the complexities of globalization as a
whole to conform to their own domestic economic agenda. Globalization itself
should not be hindered. But the extent and pace of its progress should be made to
reflect the nation’s situation and presenting economic dispensation so that in the
long run, the developing country itself would be able to strongly compete in the
wider confluence of globalization.
Negative effects of globalization for developing country business
Critics of global economic integration warn that (Watkins, 2002, Yusuf, 2001):
 The growth of international trade is exacerbating income inequalities, both
between and within industrialized and less industrialized nations
 Global commerce is increasingly dominated by
transnational corporations which seek to maximize profits without regard for
the development needs of individual countries or the local populations
 Protectionist policies in industrialized countries prevent many producers in
the Third World from accessing export markets;
 The volume and volatility of capital flows increases the risks of banking
and currency crises, especially in countries with weak financial institutions
 Competition among developing countries to attract
foreign investment leads to a "race to the bottom" in which countries
dangerously lower environmental standards
 Cultural uniqueness is lost in favor of homogenization and a
"universal culture" that draws heavily from American culture
Critics of economic integration often point to Latin America as an example where
increased openness to international trade had a negative economic effect. Many
governments in Latin America (e.g. Peru) liberalized imports far more rapidly than
in other regions. In much of Latin America, import liberalization has been credited
with increasing the number of people living below the USD $1 a day poverty line
and has perpetuated already existing inequalities (Watkins, 2002).

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Positive effects of globalization for developing country business
Conversely, globalization can create new opportunities, new ideas, and open new
markets that an entrepreneur may have not had in their home country. As a result,
there are a number of positives associated with globalization:
 It creates greater opportunities for firms in less industrialized countries to tap
into more and larger markets around the world
 This can lead to more access to capital flows, technology, human capital,
cheaper imports and larger export markets
 It allows businesses in less industrialized countries to become part of
international production networks and supply chains that are the main
conduits of trade
For example, the experience of the East Asian economies demonstrates the positive
effect of globalization on economic growth and shows that at least under some
circumstances globalization decreases poverty. The spectacular growth in East
Asia, which increased GDP per capita by eightfold and raised millions of people
out of poverty, was based largely on globalization—export-led growth
and closing the technology gap with industrialized countries (Stiglitz, 2003).
Generally, economies that globalize have higher growth rates than non-globalizes
(Bhagwati and Srinivasan, 2002).
Also, the role of developing country firms in the value chain is becoming
increasingly sophisticated as these firms expand beyond manufacturing
into services. For example, it is now commonplace for businesses in industrialized
countries to outsource functions such as data processing, customer service and
reading x-rays to India and other less industrialized countries (Bhagwati et al,
2004). Advanced telecommunications and the Internet are facilitating the transfer
of these service jobs from industrialized to less industrialized and making it easier
and cheaper for less industrialized country firms to enter global markets. In
addition to bringing in capital, outsourcing helps prevent "brain drain" because
skilled workers may choose to remain in their home country rather than having to
migrate to an industrialized country to find work.
Further, some of the allegations made by critics of globalization are very much in
dispute—for example, that globalization necessarily leads to growing income
inequality or harm to the environment. While there are some countries in which
economic integration has led to increased inequality—China, for instance—there is

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no worldwide trend (Dollar, 2003). With regard to the environment, international
trade and foreign direct investment can provide less industrialized countries with
the incentive to adopt, and the access to, new technologies that may be more
ecologically sound (World Bank Briefing Paper, 2001). Transnational corporations
may also help the environment by exporting higher standards and best practices to
less industrialized countries.

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Cost of Capital
Meaning of Cost of Capital:
An investor provides long-term funds (i.e., Equity shares, Preference Shares,
Retained earnings, Debentures etc.) to a company and quite naturally he expects a
good return on his investment.
In order to satisfy the investor’s expectations the company should be able to earn
enough revenue.
Thus, to the company, the cost of capital is the minimum rate of return that the
company must earn on its investments to fulfill the expectations of the investors.
Capital for a small business is simply money. It is the financing for the small
business or the money used to operate and buy assets. Cost of capital is the cost of
obtaining that money or financing for the small business. The cost of capital is also
called the hurdle rate.
Should very small businesses even worry about their cost of capital? The answer to
that is absolutely yes! Even very small businesses need money to operate and that
money is going to cost something.
Companies want that cost to be as low as possible.
What is Capital?
Capital is the money businesses use for financing their operations. The cost of
capital is simply the rent, or interest rate, it costs the business to obtain financing.
In order to understand cost of capital, you must first understand the concept of
capital. Capital for very small businesses may just be the supplier credit they rely
on. For larger businesses, capital may be the supplier credit and longer term debt or
liabilities, which are the firm's liabilities.
If a company is public or takes on investors, then capital will also include equity
capital or common stock. Other equity accounts will be retained earnings, paid-in
capital, perhaps preferred stock.
Why is Capital Important?
In order to build new plants, buy new equipment, develop new products, and
upgrade information technology, businesses have to have money or capital.

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For every decision like this, a business owner or Chief Financial Officer (CFO) has
to decide if the return on the investment is greater than the cost of capital or the
cost of the money it takes to invest in the project.
Business owners do not usually invest in new projects unless the return on the
capital they invest in these projects is greater than or at least equal to the cost of the
capital they have to use to finance these projects.
Cost of capital is the key to all business decisions.
What is the Cost of Capital?
A company's cost of capital is simply the cost of money the company uses for
financing. If a company only uses current liabilities and long-term debt to finance
its operations, then it uses debt and the cost of capital is usually the interest rate on
that debt.
If a company is public and has investors, then cost of capital gets more
complicated. If the company only uses funds provided by investors, then the cost
of capital is the cost of equity. Usually, this type of company has debt but it also
finances with equity financing or money that investors supply. In this case, the cost
of capital is the cost of debt and the cost of equity.
The combination of debt and equity financing for a company is the
company's capital structure
What is Return on Capital?
Return on capital is the amount of profit you earn out of a business or project as
compared to the amount of capital you invested. The key to cost of capital for a
company is that a company's return on capital must always equal or exceed the cost
of capital for any project in which the firm wants to invest. In other words, the
company's investment rate of return (return on capital) must equal or exceed their
financing rate of return (cost of capital) in order for the firm to be profitable.
What Composes the Cost of Capital
One component of the cost of capital is the cost of debt financing. For larger
businesses, debt usually means large loans or bonds. For very small companies, the
debt can mean trade credit. For either, the cost of debt is the interest rate the
company pays on debt.

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Another component of the cost of capital is the cost of equity financing if your
company is a public company; in other words, if you have investors in your
company who provide money in exchange for an ownership stake in the company.
There are several components of the cost of equity capital. First, there is the cost of
retained earnings or the money that the company invests back into the company,
instead of paying out dividends. Next, there is the cost of new common stock or
stock that the company issues to raise money.
Last, the company may even issue preferred stock to raise money.
For very small firms, the cost of capital may be much simpler. There are
advantages and disadvantages to both debt and equity financing, including cost,
that any business owner must consider before adding them to the capital
structure of the company. Very small firms may just use short term debt, in which
case we have to establish a cost for this capital component.
The Company's Weighted Average Cost of Capital
Once the business owner understands the concepts of capital and cost of capital,
the next step is to understand weighted average cost of capital. Each capital
component is a certain percentage of the company's capital structure. In order to
arrive at the true cost of capital for a business firm, the owner must multiply the
percentage of the company's capital structure for each component by the cost of
that component and sum them.
Before a company can engage in buying assets or obtaining financing for its
operations, it must make some determination of its cost of capital -- what it really
costs the firm for the money it has to have to for all its financing. That cost of
financing must never exceed its return on capital.

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CONCLUSION
Before a company can engage in buying assets or obtaining financing for its
operations, it must make some determination of its cost of capital -- what it really
costs the firm for the money it has to have to for all its financing. That cost of
financing must never exceed its return on capital. There are several components of
the cost of equity capital. First, there is the cost of retained earnings or the money
that the company invests back into the company, instead of paying out dividends.
Next, there is the cost of new common stock or stock that the company issues to
raise money Once the business owner understands the concepts of capital and cost
of capital, the next step is to understand weighted average cost of capital. Each
capital component is a certain percentage of the company's capital structure. In
order to arrive at the true cost of capital for a business firm, the owner must
multiply the percentage of the company's capital structure for each component by
the cost of that component and sum them.

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